The debt-heavy Murray Goulburn co-operative is making more money as dairy markets improve, but continues to struggle to source enough milk to help its ailing financial position.

Murray Goulburn (MG) has confirmed a 30 per cent slump in its milk intake to 1.1 billion litres in the first half of the 2017-18 trading year basically because it can’t afford to pay competitive farmgate milk prices above its promised $5.60 a kilogram (milk solids) for the season.

Even that price commitment remains at risk if the co-op’s planned mass asset sale to Canadian cheese giant, Saputo Inc, fails to go ahead before the end of June and creditors set new debt financing arrangements.

The big MG co-op has a supplier and factory footprint spanning Victoria, Tasmania and NSW, and until two years ago was by far Australia’s biggest milk processing business.

However, managing director, Ari Mervis, said its inability to pay competitive milk prices in the past two seasons had resulted in “a substantial loss of milk” and limitations on its ability to trade its way to profit.

Continued milk intake decline was on the cards if the $1.3 b sell off of MG assets and liabilities to its Canadian suitor did not proceed as planned, or if an alternative deal could not be locked down.

Mr Mervis’ sober warning came as MG reported a statutory net loss after tax of $27.5 million today.

“MG may not be able to pay a competitive farmgate milk price,” he said.

“Further losses of milk flow may trigger an impairment to MG’s assets that could breach banking covenants and result in potential withdrawal of creditors’ support and an increased risk to MG’s ability to refinance its expiring debt facilities.”

“The first half of this financial year has continued to be challenging for MG,” Mr Mervis said.

“While management initiatives continue to address the cost base and commercial performance, the business remains exposed to competitive pressures and future refinancing requirements.”

The high value ingredients and nutritionals business was one area typically squeezed by the reduced milk intake, restrained from generating more revenue because it lacked raw materials.

The segment’s revenue of $357m was down almost 26pc on the same period a year ago.

Although MG’s trading loss was a 13.5pc improvement on the same time a year ago, and its debt has reduced 30pc to $474m, its total asset to equity gearing actually grew slightly (1pc) as a result of the company’s big asset valuation write downs last May and the continued scaling back of its factory operations.

Total debt levels have been relatively unchanged since last July, although were expected to be lower by the end of the financial year.

On the plus side of the ledger, MG’s dairy foods business revenue rose 10.7pc to $617m in the first half, resulting in an improvement in segment contribution of 36.8pc to $56m.

Improving commodity prices had begun to flow through to sales contracts in the domestic market, while the co-op’s decision to cut back product lines and to focus on driving improved margins in its best performing market categories assisted trading performance.

International sales increased by $10.3m, driven by growth in adult milk powder and ultra high temperature (UHT) treated milk sales in China.

The $357m contribution of the ingredients business had been helped by milk supplies being re-allocated away from lower returning ingredients, plus a lift in improved commodity prices.

Revenues from MG’s trading and milk broking division totalled $147m.

The company continued to focus on prudently managing working capital and cutting capital expenditure, Mr Mervis said.

MG had $240m of available financing facilities classified as current which will expire in 2018, of which $181 million is undrawn.

He said the successful completion of the transaction remained a priority focus for the business,

MG would continue working closely with Saputo to achieve completion as soon as possible, including obtaining all required regulatory approvals.

A Foreign Investment Review Board ruling on Saputo’s bid was expected following a review of competition issues by the Australian Competition and Consumer Commission, due by March 1.

An extra-ordinary meeting of MG shareholders would be called “once there is clarity on both the ACCC and FIRB processes”.

At this stage, the 21 day notice of the meeting was expected to be distributed in March or April.